In the last decade we have seen the Dow decline from the 11,500 level to just below 8000, then rise to near 14,000 just before it fell back near 7000 only to now reside at levels near 10,500. Net Effect? Dow down 9% over the last 10 years. And that’s after a 60% rally from it’s recent low of 7063 in 2007.
Now the worst is over right? The Dow and other indexes have been moving and shaking just enough to jiggle backwards. Now they have to rise. Well here’s an excerpt from a recent article written by Kevin DeMeritt, President of Lear Capital and extremely insightful economist.
Nothing says the Dow has to go up after a prolonged period of inactivity. Consider the Depression. The Dow finally revisited the September 1929 market high…25 years later, in November 1954! So…"Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even." –Analyst R. Salsman. As if that’s not bad enough, it doesn’t take into account the inflation that took place during those 25 intervening years, seriously diluting an investor’s initial purchasing power. So buying low (at least at what we think is low) is not the panacea we assume it to be. What’s more, the age-wave of retiring baby boomers will soon start staying away from the stock market in droves, thinning the ranks. They’ll be retiring instead. It’ll be like looking fondly back at the good old days.
Being a late boomer myself, I am especially concerned about my own retirement. One can’t help but perceive a high risk in stocks going forward. If history is repeating itself here, and we have say 15 more years of flat markets, how much can you rely on stocks to provide your retirement income?
No one says give up on stocks entirely, that could cause a self-fulfilling crash. But no one can deny the importance of diversification. Consider this, during the same 10 year period, wherein stocks languished then landed on a net loss of 9%, gold quadrupled. So, let’s say your portfolio started at $10,000 worth of stocks. By the end of the period, it was worth $9100 reflecting the 9% loss.
If you would have taken $2,000 of the original $10,000 and implemented a gold diversification strategy, the gold portion of your portfolio would have been worth $8000. And since you started with just $8000 worth of stocks you would only have lost $720 leaving you still with $7280 worth of stocks.
Now, the combined value of the diversified elements of your portfolio, at the end of the 10 year period, is $15,280 and not $9100. Conclusion? Buy Gold! Diversification is cheap and if we are looking for 15 more years of the same anemic markets, a gold coin is still a bargain at today’s prices. I’m not sure we can say that about stocks.